Business models and secret sauces

As mentioned in the last post, today's New York Times has an article of the good people at Talx. One thing that caught my eye was this account of the company's rise:

Talx entered the field brashly, buying the industry’s two largest companies on a single day in 2002. In the next few years, it bought five more. Until then, Talx had never handled an unemployment claim, and skeptics wondered how well it could blend seven companies in an unfamiliar industry.

The Federal Trade Commission argued in a 2008 antitrust complaint that the acquisitions, which cost $230 million, had allowed Talx to “raise prices unilaterally” and “decrease the quality of services.” Talx modified some contracts to settle the case, but admitted no legal violations.

Financially, the gamble paid off: Talx was acquired three years ago by Equifax, the credit-rating giant, for $1.4 billion. But work once done locally became centralized — at a loss, critics say, of responsiveness and expertise.

If this article had been written in 2007*, I suspect the proportions would have been reversed, with two or three paragraphs on complaints and ethical lapses and the rest focused on the company's rise to dominance. Shortly before the collapse, even sober institutions like the New York Times were more inclined to focus on success and less inclined to pay attention to the man behind the curtain.

These success stories were filled with wide-eyed descriptions of innovative business plans and nimble management. There were often vague, portentous references to sophisticated analytic tools and powerful proprietary models and algorithms that could only be appreciated by a handful of Nobel Prize winners.

But when you looked closely at these companies or, better yet, sat down and talked with the people who actually came up with this stuff, you usually found yourself in the position of the trainees at a fast food restaurant in Fast Times at Ridgemont High who learned that the mysterious secret sauces of two rival chains were, respectively, thousand island dressing and ketchup & mayonnaise.

On close inspection, most innovations and business models, including the heavily hyped ones, turn out to be mundane and unimpressive: switched to cheaper suppliers, dropped expensive features or services, introduced some basic statistical tool like logistic regression, marketed a high-fee product to an underserved segment. More than a few are based on creative accounting or a cozy relationship with various regulatory agencies.

Talx' strategy was based on two simple components:

1. Most big companies will be reluctant to work with a small companies so if you buy up most of your competition you can set prices like a monopoly;

2. The penalties for breaking the law are small and the penalties for bending it are negligible relative to the potential benefits.

Neither idea was profound. Neither required a team of Ph.D.s for implementation. They were, however, wildly successful for Talx, just as they have been for any number of companies with much better P.R. departments.



* Very few were. The company doesn't even have a Wikipedia page.

Sleaziness as a business model -- first of two posts on Talx

Contesting Jobless Claims Becomes a Boom Industry

By JASON DePARLE

WASHINGTON — With a client list that reads like a roster of Fortune 500 firms, a little-known company with an odd name, the Talx Corporation, has come to dominate a thriving industry: helping employers process — and fight — unemployment claims.

Talx, which emerged from obscurity over the last eight years, says it handles more than 30 percent of the nation’s requests for jobless benefits. Pledging to save employers money in part by contesting claims, Talx helps them decide which applications to resist and how to mount effective appeals.

The work has made Talx a boom business in a bust economy, but critics say the company has undermined a crucial safety net. Officials in a number of states have called Talx a chronic source of error and delay. Advocates for the unemployed say the company seeks to keep jobless workers from collecting benefits.

“Talx often files appeals regardless of merits,” said Jonathan P. Baird, a lawyer at New Hampshire Legal Assistance. “It’s sort of a war of attrition. If you appeal a certain percentage of cases, there are going to be those workers who give up.”

When fewer former workers get aid, a company pays lower unemployment taxes.

Wisconsin and Iowa passed laws to curtail procedural abuses that officials said were common in cases handled by Talx. Connecticut fined Talx (pronounced talks) and demanded an end to baseless appeals. New York, without naming Talx, instructed the Labor Department staff to side with workers in cases that simply pit their word against those of agents for employers.

...

Advocates for the unemployed cite cases like that of Gerald Grenier, 47, who spent four years as a night janitor at a New Hampshire Wal-Mart and was fired for pocketing several dollars in coins from a vending machine. Mr. Grenier, who is mentally disabled, told Wal-Mart he forgot to turn in the change. Talx, representing Wal-Mart, accused him of misconduct and fought his unemployment claim.

After Mr. Grenier waited three months for a hearing, Wal-Mart did not appear. A Talx agent joined by phone, then seemingly hung up as Mr. Grenier testified. The hearing officer redialed and left an unanswered message on the agent’s voice mail. The officer called Mr. Grenier “completely credible” and granted him benefits.

Talx appealed, claiming that the officer had denied the agent’s request to let Wal-Mart testify by phone. (A recording of the hearing contains no such request.) Mr. Grenier won the appeal, but by then he had lost his apartment and moved in with his sister.

“That was a nightmare,” he said.

In the case of Dina Griess, Talx and its client, the subprime lender Countrywide Financial, were involved in what a judge deemed an outright fraud. Ms. Griess worked for Countrywide outside Boston and quit as it collapsed in 2008, saying she was distressed by internal investigations of lending practices. People can receive unemployment benefits if they quit for “good cause,” like unsafe working conditions, but Talx argued that Ms. Griess’s reason did not meet the legal standard.

She won benefits at a hearing that Talx and Countrywide skipped, but Talx successfully appealed, saying the Countrywide witness had missed the hearing because of a family death. Later asked under oath if that was true, the witness said, “No, it’s not.”

A Massachusetts judge reviewing the case, Robert A. Cornetta of Salem District Court, denounced the deceit and gave Ms. Griess benefits. “The court will not be party to a fraud,” he said.

[click here for a history of complaints -- Mark]